Constructon Rules for Mornngstar Canada Dvdend Target 0 Index TM Mornngstar Methodology Paper January 2012 2011 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or n part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
Contents Index Characterstcs Overvew Incepton Dates and Base Values Calculaton and Dssemnaton Tradng Holdays Index Value Currences Scheduled Reconsttuton Dates Scheduled Rebalancng Dates Index Commttee Assgnng Stocks to the Index Overvew Investable Unverse Index Elgblty Index Selecton Index Calculatons Basc Formula Constructed Shares and Consttuent Weghtng Dvsor Adjustments 4 5 5 5 5 5 6 7 8 9 Corporate Acton Adjustments 10 Data Correcton and Precson 12 Appendx A: Mornngstar Varable Descrptons 1 n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 2
Index Characterstcs Overvew The Mornngstar Canada Dvdend Target 0 Index (the Index ) s an ndex reflectng the performance of 0 dvdend payng Canadan based equtes. The consttuents are selected from a unverse comprsed of consttuents tradng on the Toronto Stock Exchange (the TSX ) and are classfed as Canadan securtes by Mornngstar (each a Securty and collectvely the Securtes. The Index s reconsttuted and rebalanced quarterly and postons are equally weghted. The followng ndex constructon rules are ntended to represent the optons for nvestment n portfolo of hgh qualty dvdend payng equtes. Incepton Dates and Base Market Values The base date of the Index s December 1, 2001 when the base ndex value was set to 1,000. Lve calculaton of the ndex commenced January 19 th 2012. Calculaton and Dssemnaton of Index Values Prce return ndex values are dssemnated electroncally at 15-second ntervals durng regular tradng hours, and dssemnated over the Börse Stuttgart tape. Daly and monthly prce and total return ndex values are dstrbuted va varous data dstrbuton channels and are avalable on http://ndexes.mornngstar.com. Tradng Holdays The Mornngstar Canada Dvdend Target 0 Index s not calculated when the Toronto Stock Exchange s closed. Index Value Currences The closng values of the Index are calculated n Canadan Dollars, and U.S. Dollars usng an average of Reuters bd and ask prce. Scheduled Reconsttuton Dates The Index s reconsttuted.e., the Index membershp s reset four tmes annually. Adjustments are made at the close of trade on the thrd Frday of March, June, September, and December. The changes become effectve on the next busness day. Scheduled Rebalancng Dates The weghtng of each Securty are adjusted four tmes annually. Adjustments are made on the Monday followng the thrd Frday of March, June, September, and December. If the Monday s not a busness day, then rebalance occurs on the next busness day. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
There wll be two varatons of the Index. One varaton wll have same-day reconsttuton and the other varaton wll have a 5-day reconsttuton. For the second varaton, reconsttuton and rebalancng adjustments may are made over fve exchange tradng days followng the thrd Frday of March, June, September, and December. In ths case, 20% of each reconsttuton wll be performed each day. The reconsttuton starts wth Frday s close data. Mornngstar Index Commttee The Mornngstar Index Commttee conssts of Mornngstar s Index Groups followng leaders: Head of Busness Unt, Head of Operatons, and Head of Product Development. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 4
Assgnng Stocks to the Mornngstar Canada Dvdend Target 0 Index Overvew At each reconsttuton date, the nvestable unverse and ndex elgblty are defned based on the crtera descrbed n ths secton. The nvestable unverse and ndex elgblty crtera are appled n the sequence n whch they appear below. Each crteron s appled only to the survvors of the crtera appled prevously. Data Dates To perform each reconsttuton data from the last busness day of the month pror to effectve date of the reconsttuted portfolo s utlzed. For example, the June reconsttuton, effectve at close of trade on the thrd Frday of June, s based on data as of last busness day of May. Investable Unverse To qualfy for ncluson n the nvestable unverse, a Securty must meet the followng crtera: 1) Prncpal Exchange for the securty must be lsted on the Toronto Stock Exchange (TSX) 2) It must be one of the 100 stocks wth the hghest 12-month average tradng volume and Expected Dvdend Yeld greater than 1% ) Only Securtes of frms that are domcled n Canada and who have Common Shares or Unts of Income Trusts qualfy for ncluson n the Index Index Elgblty To be ncluded n the Index, a Securty must have an average monthly volume (12 month) greater than $200 mllon or the average daly volume ( month of such Securty must be greater than $10 mllon. Index Selecton At each reconsttuton, Securtes n the nvestable unverse are assgned a Weghted Average Fundamental Factor Rank (the WAFFR ) based on ther weghted average rank of the followng fve fundamental factors (see Appendx A for fundamental factor defntons): Fundamental Factor Expected Dvdend Yeld.% Cash Flow to Debt 20% 5 Year Normal EPS Growth 1.% Strategy Weght n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 5
Return on Equty 20% -Month EPS Estmate Revson 1.% The WAFFR for each Securty s determned on each rebalance date by Mornngstar as follows. For each fundamental factor relatve rankngs for all stocks are calculated where Securtes wth the best possble value wll be gven a score of 100 whle the Securtes that have the worst possble value wll be gven a score of 0. Ths score out of 100 s multpled by the assgned strategy weght and repeated for each varable that has been assgned a weght. A total score s then tabulated for all Securtes. The Securtes wth the hghest score wll be ranked 1 whle the stock wth the lowest total score receves the worst rank. Once the Securtes are scored by ther respected fundamental factors Securtes meetng the Index elgblty are selected to the Index n the followng manner: Rank order of Securty by ther WAFFR Current consttuents meetng all the followng crtera are retaned n the Index: o Ranks n the top 75 by ther WAFFR o Has an Expected Dvdend Yeld greater than 1.25% Addtonal securtes are added to the Index n order of WAFFR untl the Index conssts of 0 consttuents provded that they have meet all of the followng condtons: o Have an Expected Dvdend Yeld of 2% o Rank amongst the top 75 by WAFFR o Do not exceed a cap of 8 Securtes per GICS sector n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 6
Index Calculatons Basc Formula The value (prce) and total return of the Index s calculated usng Laspeyres formula. n (p (t)*s (t)) =1 Index(t)= *BaseIndexValue=(M(t)/B(t))*BaseIndexValue n C(t) (p (0)*s (0) j=1 The above formulas can be smplfed as: j j M(t) Index(t) = D(t) Where: D(t) = dvsor at tme (t)=b(t)/base Index Value n = number of securtes n the Index p (0) = closng prce of securtes at the base date s (0) = constructed securtes of company at the base p (t) = prce of securtes at tme (t) s (t) = constructed securtes of company at tme (t) C(t) = adjustment factor for the base date market captalzaton t = tme the Index s calculated M(t) = market captalzaton of the Index at tme (t) B(t) = adjusted base date market captalzaton of the Index at tme (t) It s mportant to note that the shares (s (t)) for the Index consttuents are artfcal constructs used for calculaton purposes. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 7
Index Calculatons (Cont.) Constructed Shares and Consttuent Weghtng The Index s an equal weght ndex. An Index consttuents weghtng n the Index s determned by: 1 IW(q)= n And the constructed shares (s (t)) for each consttuent n the Index calculaton formula are determned as follows: s (t)= n j=1 (s (t-1)p (t-1)*iw(q) j j p (t-1) Where: n = number of securtes n the Index (q) = quarter end tme the weghtngs of the consttuents n the Index are calculated (t) = tme the new Index shares are calculated p (t) = prce of securtes at tme (t) IW (q) = company weght n Index at quarterly rebalancng tme q s (t-1) = constructed shares of company at tme t mnus 1 * * At tme of ncepton of the Index, the constructed shares are determned by an arbtrary portfolo value, $10 Bllon. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 8
Index Calculatons (Cont.) Dvsor Adjustments To avod dstortons caused by corporate actons that affect the share captal of Index consttuents, the dvsor of the Index s adjusted accordngly. The followng formulae wll be used for dvsor adjustments due to corporate acton. D(t+1)=D(t)* n =1 n =1 [ ] (p (t)*s (t))+ MV(t+1) (p (t)*s (t)) Note: If the current tradng prce of an ssue s unavalable, the prevous tradng sesson s closng prce s used. However, f the ssue s affected by any corporate acton that requres an adjustment, then the adjusted prce s used. Where: D(t) = dvsor at tme (t) D(t+1) = dvsor at tme (t+1) p (t) = stock prce of company at tme (t) s (t) = number of shares of company at tme (t) MV(t+1) = aggregate change n market value resultng from corporate actons Most but not all of the followng actons wll requre the calculaton of an adjustment factor whch wll be ncluded n the after-market-close ndex calculaton on the prevous busness day descrbed above n the secton ttled Basc Formula. Generally, because the Index s not market cap weghted changes to the share captal structure of Index consttuents wll not affect the component weghts. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 9
Corporate Acton Adjustments Spn-Offs Issuers spun off by Index consttuents (parent company) are not added to the Index but wll be consdered for ncluson at the next reconsttuton. The weght of the parent company s reduced by a factor of the spn-off converson rato that s the weght s a product of the orgnal shares and the new prce. A dvsor adjustment s made to account for the reducton n market value. Mergers and Acqustons If an Index consttuent acqures or merges wth another ssuer of a Securty n the Index, the affected Securtes are replaced by the Securty of the successor entty. The weght of the new Securty s equal to the market value sum of the affected Securtes pror to the completon of such merger or acquston. If an Index consttuent acqures or merges wth ssuer of a Securty that s currently not a component of the Index, then the affected Securty s replaced by the securty of the successor entty. The weghtng of the successor entty n the Index s equal to the market value of the affected Securty. A dvsor adjustment s not necessary because the ndex market value remans unchanged. If an Index consttuent s acqured or merged by an entty that s not an Index component, the affected Index consttuent s removed from the Index. A dvsor adjustment s made to reflect the decrease n market value. Stock Dvdends / Splts Stock splts and dvdends do not requre a dvsor adjustment because the market value of the entty remans unchanged. Share Repurchase / Offerng If an Index consttuent ssues or repurchases shares, the new share captal structure s consdered at the next rebalancng date. Delstng, Bankruptcy, and Fnancal Dstress If an Index consttuent s delsted by ts prncpal exchange (.e. the TSX), enters bankruptcy proceedngs, or s determned to be under fnancal dstress by the Mornngstar Index Commttee, the Securty s removed from the Index. Exceptons are made on a case-by-case bass. For example, a Securty mght not be removed mmedately when a bankruptcy flng s n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 10
not a result of operatng or fnancal dffcultes. Upon deleton, a dvsor adjustment s made to reflect the decrease n market value. Change of Prncpal Exchange A Securty s removed from the Index f ts prncpal exchange ceases to be the TSX. A dvsor adjustment s made to reflect the decrease n market value. Change of Domcle If a company ceases to meet the company domcle elgblty rule, the company s removed from the Index. The domcle of the company must be Canada. A dvsor adjustment s made to reflect the decrease n market value. Loss of Lqudty If a consttuent accumulates 10 consecutve non-tradng days between reconsttuton dates, t s removed from the Index. Two busness days pror notce of ts removal s provded. A dvsor adjustment s made to reflect the decrease n market value. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 11
Data Correctons and Precson Index-Related Data and Dvsor Correctons Incorrect prcng and corporate acton data for ndvdual ssues n the database wll be corrected upon detecton. Correctons are lmted to 2 hours after close. Computatonal and Reportng Precson All calculated and adjusted data are stored n real numbers. For reportng purposes, Index values are rounded to two decmal places and dvsors are rounded to approprate decmal places. Undocumented Events Any matter arsng from undocumented events wll be resolved at the dscreton of the Mornngstar Index Commttee. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 12
Appendx A: Mornngstar Varable Descrptons Average Daly Tradng Volume The average daly tradng volume s a measure of the lqudty of an ssuer s shares or unts, as applcable. It s calculated by takng a securty s daly tradng volume for the past quarter and calculatng the arthmetc average. Cash Flow-to-Debt Cash Flow-to-Debt s a measure of a company s excess earnngs avalable to debt holders. Cash Flow s a measure of earnngs after expenses and taxes. Cash flows are essental to the solvency of a corporaton. Debt s the sum of the short-term and long-term debt securtes of a company. Expected Dvdend Yeld Expected Dvdend Yeld s a measure of the dvdends that a company s expected to pay each year. It s calculated by dvdng the annual dvdends per share by the current prce per share where the annual dvdends per share are equal to the product of the most recent dvdend pad tmes the payment frequency. -Month EPS Estmate Revson -month EPS estmate revson measures the percentage change over the past months n the medan broker dluted earnngs estmate for a company's current fscal year. For example, an estmate revson of 15% means that current year earnngs estmates have been rased by 15% over the past months. Hgh values are consdered best for rankng purposes. Return on Equty Return on Equty s a measure of the ncome generated by the equty contrbuted by shareholders. It s calculated by dvdng the adjusted net ncome by adjusted shareholder s equty. Net ncome s adjusted by CPMS to reflect the net ncome from contnuous operatons. Adjustments nclude, but are not lmted to mark to market accountng standards, one-tme tems and restructurng costs. Shareholder equty s adjusted by CPMS to reflect the current share captal of the frm snce the last flng. Ths would nclude adjustments for, but s not lmted to, share ssuances, spn offs, and dvdends pad. 5-Year Normal EPS Growth Earnngs-Per-Share ( EPS ) s a measure of a company s earnngs spread over the shares of a company s outstandng equty. The 5-Year Normal EPS Growth s a hstorcal metrc that reflects the EPS growth over a fve year perod. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 1